Empirical Test Of Herding Behavior On Chinese Equity Market

Modern Financial Theory (MFT) is basically built on the assumption that market participants are rational. Then some classical financial theories such as capital asset pricing model and arbitrage pricing theory come to the world in the following research. However, there are some phenomena such as herd behavior cannot be explained by the modern financial theory in the real financial market. The CSI300 index rose from 1414.45 to 5891.71 which is the peak of CSI300 index on Oct.17th 2007. Then the index slumped to 1833.24 in the following year. During these two years, the volatility of index is higher than 300%. The high volatility of the Chinese security market reflects the market is not efficient and herd behavior is one of the most important expressions.The Chinese security market has been set up more than 20 years which has grown to one of the most important security markets in the world. The research of herd behavior in Chinese security market combing the behavioral finance theory and China’s national condition has great significance to both the sustainable development of capital market and investors.Firstly, the paper summarizes the theory of herd behavior including the base theory and the method of testing and empirical research. Then the paper utilizes the CSAD (cross-sectional absolute deviation) model to test the herd behavior of CSI300 index (2002-2013) and SME index (2005-2013) respectively. The test results showed the herd behavior significantly exists in Chinese security market. What is more, we found herd behavior is more obvious when the market is declining than increasing. We found herd behavior is significantly obvious in cyclical industry while no obvious herd behavior was found in non-cyclical industry. Furthermore, the paper explained why there will be herd behavior in Chinese security market in macro and micro perspective. Combining behavioral finance theory and China’s national condition, the paper tells us the causes of the differences of herd behavior in different periods of market and industries. Finally, the paper puts forward some suggestions for the government and investors.